Slow Motion Wreck Hits The Exchanges...Again

Another day, another slow motion, automated, train wreck-type move in equity futures trade. The European futures trade was held in a 0.5% range for 15 hours on Thursday, and then, on cue, just as the closing bell rang across Euro-land the high-frequency trading algorithms kicked in and wrecked the best laid plans of buy-and-holders.

The moves decimated the near-term Dax, FTSE, and CAC charts.

S/P futures responded, and handily smashed three 30-minute candles containing 1.5% of the S/P value into the lap of anybody looking to be in a trade for anything more than half a session.

Cash markets are not to be trusted, especially with the Mad Hatter and Tweedle Dee and Tweedle Dumb running the show.

Forex Movers- Thursday trade is all about melt-ups and melt-downs with Cad, Aussie, and Cable close to their opening prices after a huge swing back and forth overnight, in-line with global equity futures going on a roller coaster ride.

Forex Shakers- Eur, Jpy, and Chf have all held their moves against the Usd, as global markets go into another melt-down. The current market conditions require a trade plan, a sound constitution, solid money management, a realistic view of what should be banked and when, and the understanding that trades may need to be taken on multiple occasions before one will hold.

The markets are tradable, they just need agility, and an understanding of the fact that computer coding maybe went just a few X’s and O’s too far in regard to contingency hedges that seem to have been designed to cream those who are idly monitoring last quarter’s 401K statement.

The computer coders replaced the trade desk specialist, and in doing so removed a path of liquidity that would balance the needs of all participants. No specialist on the desk means that computer algorithms are sent out to look for liquidity instead, and when they cannot find it the low-volume melt-ups and melt-downs appear.

Low LiquidityInter-bank lending is not happening in any great degree, and is expensive to insure, which leads to a lack of leverage and a heightened distrust of holding anything past the closing bell. That scenario is then leading to the need to balance books at the close of every regional session, three times a day.

After all, not many would trust a hefty open position to a computer algorithm if at any time between market close and market open the liquidity dries up.

And so we have the new generation of global risk markets, built by default for traders and not investors, with nuances that many will take too long to adjust to.

Suffice to say, it will be the prop desks that rape and pillage their way through 2010, and it will be the prop desk that issues a client note on January 1st 2011 that explains the reason why they made more in spread than performance fees, and that average Joe would be so much better off under their wing, because of the treacherous waters that lie beneath the Exchange floors.

Instead of having a 300 point stop loss for a 20 point gain, the answer is to determine the 4-hour trend (90 SMA), look to trade in that direction with regular exposure, or counter-trend with 50% reduced exposure.

Look to buy support at main price action points from the previous session, looking to the low of the day initially, and bank two sets of 30% of the position and pull the stop to the entry at target 1, before hitting the high of the previous day. Leave 40% as a runner that can test the previous HOD, and be prepared to close out if it fails to break.

Timing The TradeKeep an eye on the clock, and ride futures momentum at 2am (Dax), 6-7am (London Fixings), 11am European close, 2.30pm (Nymex close). Outside of those times, forget it, there is no momentum, and forget trading the cash market. Futures-based algorithms are stealing all of the moves ahead of the cash-trading herd.

In these conditions there really is no need to look for dividends, which may cycle back into vogue eventually but that will take a while, as the dividend amount is always at risk of being diluted by depreciation in the underlying asset via the daily melts that are an integral part of the Exchange days.

The easiest route to longevity is to trade in-line with global risk, and hedge that risk as required, with currency and futures contracts. Buy and Hold is dead; long live Futures Trading. Get in, get banked, get out, and sit by and watch the carnage happen while the analysts go about explaining why you should actually be in the wreck, rather than watching with your futures trades in the bank.